UK - Applying the switch from the retail price index (RPI) to the consumer price index (CPI) retroactively will create a pension system where "virtually everything" done to date will be "mismatched", State Street Global Advisors has warned.

Speaking to IPE, Raymond Haines, head of liability-driven investments (LDI), added that the lack of CPI hedges would pose even more problems.

"The issue from an LDI perspective on the move from RPI to CPI is the simple one - that there are no readily available CPI hedges," he said.

"The only groups that actually use CPI on the revenue side are housing associations, which are, in aggregate, very, very small.

"So you really have to look to the government, or the Debt Management Office (DMO), to start issuing CPI-linked bonds."

Haines said a switch to CPI implemented retroactively - which would necessitate changes to the Pensions Act of 1995, as it could lower accrued benefits - would lead to an investment mismatch.

He said the DMO would need to see growing demand for a CPI market for it to become viable, something that depends on who gets "pulled into the CPI orbit or universe".

Haines said he was unsure where the demand would come from.

"In the private sector, the traditional producers of inflation - people like the utilities - have got RPI-linked revenue streams off CPI-linked revenue streams, so it's difficult to see them launching CPI-linked bonds," he said.

Meanwhile, Dan DeKeizer, chief executive of MetLife Assurance, called on the government to generate a CPI swap market by issuing gilts ahead of new legislation.

This, he said, will result in a liquid market for trustees.

DeKeizer added: "Given that a large number of pension schemes will retain linkage to RPI, it will also be important that the government continue to retain this measure into the future."

He said pension schemes had delayed de-risking as a result of the incoming legislation.

However, Haines said that while the switch to CPI, once the extent of the legislation was clear, would result in some thorough analysis of how the investment approach matched with the new rules, he dismissed the notion that it would lead to schemes re-risking.

"I don't for one minute believe it will mean people will be re-risking schemes, but it will mean there will be a wholesale re-evaluation of what the strategies are."

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